On March 9, 2017, Toronto Stock Exchange issued Staff Notice 2017‑001 (the “Notice”), which provides guidance with respect to the TSX’s majority voting requirements for the election of directors (“Majority Voting Requirements”) and the use of advance notice policies and by-laws.
This guidance will be noteworthy for TSX‑listed companies whose majority voting policy and/or advance notice policy or by‑law has not yet been subject to review by the TSX. Such companies should assess their majority voting policy and any advance notice policy or by-law against the guidance in the Notice as soon as possible so that any necessary amendments can be effected in a timely fashion.
- Majority Voting Requirements
The TSX requires that each director of a TSX‑listed issuer be elected by a majority of the votes cast with respect to his or her election, other than at contested meetings. To comply with the Majority Voting Requirements, issuers must adopt a majority voting policy, unless they otherwise satisfy the Majority Voting Requirements in a manner acceptable to the TSX.
The Notice indicates that the TSX recently conducted a review of 200 randomly selected majority voting policies (the “Reviewed Policies”) of TSX‑listed issuers for the purpose of evaluating compliance with the Majority Voting Requirements. As a result of such review and based on the TSX’s experience from the 2015 and 2016 proxy seasons, the TSX identified: (i) several deficiencies in the Reviewed Policies; and (ii) discrepancies between the Reviewed Policies and the policy objectives of the Majority Voting Requirements.
The review identified that certain Reviewed Policies did not require a director to tender his or her resignation if he or she is not elected by at least a majority of votes cast with respect to his or her election. The Notice confirms that issuers are expected to ensure that their majority voting policies have the effect of requiring any director not elected by at least a majority of the votes cast (each, a “Subject Director”) to tender his or her resignation immediately, absent exceptional circumstances.
Importantly, the Notice also highlights the fact that a refusal by a Subject Director to tender his or her resignation may cause the TSX to review the director’s fitness to be a director, officer or other insider of TSX‑listed issuers.
Timing of Resignation
The review identified that certain Reviewed Policies: (i) did not provide a time frame for the board to render a decision as to whether or not to accept a resignation; or (ii) provided for a time frame for such a decision that was outside the 90 day period permitted by the TSX. The Notice confirms that the TSX expects each issuer’s majority voting policy to contain a provision setting out a time period for its board to make a determination with respect to a resignation within the allotted 90 day period.
The Notice also addresses majority voting policies that delegate consideration of the resignation of a Subject Director to a committee of the board and specifically state that such committee is expected to recommend that the board accept the resignation of the Subject Director, absent exceptional circumstances. The Notice confirms that majority voting policies that provide for such practice are permitted, but must explicitly state that the board will accept the resignation absent exceptional circumstances.
The Notice indicates that when a board determines not to accept a Subject Director’s resignation, the TSX will contact the issuer to discuss the applicable exceptional circumstances, including the steps the board is taking to prepare for the next director election. Moreover, the Notice states that exceptional circumstances are expected to meet a high threshold and provides the following examples of exceptional circumstances:
- the issuer would not be compliant with corporate or securities law requirements, applicable regulations or commercial agreements regarding the composition of the board as a result of accepting the Subject Director’s resignation;
- the Subject Director is a key member of an established, active Special Committee which has a defined term or mandate (such as a strategic review) and accepting the resignation of such Subject Director would jeopardize the achievement of the Special Committee’s mandate; or
- majority voting was used for a purpose inconsistent with the policy objectives of the Majority Voting Requirements.
The Notice also confirms that the TSX generally does not consider the following factors to constitute exceptional circumstances:
- the director’s length of service;
- the director’s qualifications;
- the director’s attendance at meetings;
- the director’s experience; or
- the director’s contributions to the issuer.
Notably, the Notice also remarks that the TSX expects that an exceptional circumstance is not a recurring event and that an issuer that determines not to accept the resignation of a Subject Director based on an exceptional circumstance one year is expected to take active steps to remedy the exceptional circumstance for the next year.
Participation by Subject Director
The Majority Voting Requirements provide that a Subject Director who tenders a resignation may not participate in any meeting of the board or any sub-committee of the board at which the resignation is considered. The Notice states that the TSX considers the phrase “participate in any meeting” to include attendance at the meeting. Consequently, a Subject Director must not attend any part of a meeting of the board or any sub‑committee of the board at which his or her resignation is discussed or a related resolution is voted upon. If the Subject Director must attend the meeting in order to satisfy quorum requirements, then the Subject Director must not speak or otherwise participate in any part of the meeting where his or her resignation is discussed or a related resolution is voted upon.
The Notice indicates that very few of the Reviewed Policies contained the requirement to provide a copy of the news release with the board’s decision to the TSX. The Notice confirms that the requirement to provide a copy of the news release with the board’s decision to the TSX may be included in the majority voting policy or another policy or procedure in order to ensure that the press release is provided to the TSX. The Notice reminds issuers that any such news release must fully state the reasons for not accepting the Subject Director’s resignation to enable security holders to understand the considerations of the board.
Circumventing the Majority Voting Requirements
The Notice reveals that the TSX found that certain Reviewed Policies contained additional requirements that may have the effect of evading the policy objectives of the Majority Voting Requirements. The Notice flags the following provisions as ones that the TSX considers to be incompatible with the Majority Voting Requirements or the policy objectives thereof:
- a higher quorum requirement for the election of directors compared to the quorum requirement for other resolutions; and
- majority voting policies that exclude certain nominees, such as insider nominees or incumbent directors from certain requirements or that otherwise treat certain nominees more favourably than other nominees.
TSX‑listed issuers should evaluate their majority voting policies in light of the Notice and make any necessary amendments, as soon as practicable and sufficiently in advance of the next meeting of security holders at which directors are elected, to allow nominees to comply. The timing is of particular importance because the TSX is currently conducting another review of majority voting policies adopted by TSX‑listed issuers to assess compliance with the Majority Voting Requirements.
2. Advance Notice Policies
Many TSX-listed issuers have chosen to adopt policies and by-laws prescribing timeframes and procedures to nominate directors for election to the board (“Advance Notice Policies”), generally on the basis that nominating directors for election to a board during or shortly before a meeting of security holders may be viewed as unreasonable since it may not provide security holders with sufficient time to evaluate the new information and it may be unexpected by security holders, particularly those who have granted discretionary authority to a proxy. The TSX has previously acknowledged that issuers require adequate notice of nominees for election to the board and, accordingly, that Advance Notice Policies may be legitimately used to preserve security holder interests, provided such policies do not unreasonably limit the ability of security holders to nominate directors for election to the board.
The Notice identifies that the TSX randomly selected 25 Advance Notice Policies adopted by TSX-listed issuers for review. In its review and based on its experience from past proxy seasons, the TSX identified a number of concerns in connection with the use of Advance Notice Policies. The guidance in the Notice is helpful in clarifying the TSX’s expectations with respect to the use of Advance Notice Policies.
The Notice confirms that the TSX believes that the current guidelines published by Glass, Lewis & Co., LLC and Institutional Shareholder Services Inc. for Canada regarding notification periods prior to a meeting of security holders (whether annual or special) to nominate directors (each, a “Notice Period”) in Advance Notice Policies are generally acceptable.
The Notice presents the following examples as provisions that the TSX considers to be consistent with the policy objectives of its director election requirements:
- in the case of an annual and general meeting of security holders at which directors are to be elected (“AGM”), a Notice Period ending at least 30 days before the meeting date;
- if the AGM is to be held on a date that is less than 50 days after the first public announcement of the date of the AGM, a Notice Period of at least 10 days following the notice date for the meeting;
- in the case of a special meeting called for the purpose of electing directors (whether or not also called for other purposes), a Notice Period of at least 15 days following the notice date for the meeting; and
- requirements and procedures imposed on a nominating security holder or a nominee director that are not more onerous than requirements for management and board nominees.
The Notice highlights the following as examples of clauses in Advance Notice Policies that are viewed by TSX as being incompatible with its policy objectives:
- requiring the nominating security holder to be present at the meeting at which his or her nominee is standing for election for the nomination to be accepted, notwithstanding the number of votes obtained by such nominee;
- requiring the nominating security holder to provide unduly burdensome or unnecessary disclosure, such as the dates when such security holder acquired securities of the issuer or other information that is irrelevant for security holders to make an informed decision with respect to director elections;
- requiring the nominee or nominating security holder to complete a TSX Reporting Form 4 — Personal Information Form (or its equivalent) for the nomination to be accepted, unless a PIF is also required by the issuer from management and board nominees; and
- requiring the nominating security holder to complete a questionnaire, make representations, submit an agreement or provide a written consent in the form specified by the issuer, unless such questionnaire, representations, agreement or written consent is also required by the issuer from management and board nominees.
The Notice encourages issuers to discuss novel provisions with the TSX prior to adoption.
The Notice confirms that the TSX expects that an Advance Notice Policy will give the board the discretion to waive any provision of the Advance Notice Policy. Additionally, the TSX expects issuers to adopt Advance Notice Policies sufficiently in advance of meetings of security holders at which directors are to be elected in order to allow security holders to comply with the Notice Periods.
TSX‑listed issuers should evaluate their Advance Notice Policies in light of the Notice. Advance Notice Policies that are not compliant should be amended as soon as practicable and sufficiently in advance of the next meeting of security holders at which directors are elected.